Real Estate Settlement Procedures Act (RESPA) Disclosure of Fees Paid to Mortgage Brokers; Proposed Rule and Notice of Proposed Information Collection Requirements

SUMMARY: This proposed rule would provide consumers with more

meaningful disclosures concerning the functions and fees of mortgage

brokers while protecting consumers from fees which are illegal under

the Real Estate Settlement Procedures Act (RESPA). At the same time,

the rule would provide mortgage brokers with greater clarity regarding

the application of RESPA to their fees. Under this rule, mortgage

brokers who seek clarity regarding RESPA's applicability to their fees

would enter into binding contracts with borrowers prior to the

borrowers' applications for mortgage loans. For each particular loan

transaction the broker would explain in the contract the services the

broker would provide and the broker's duties to the borrower, how the

broker's compensation is derived, and the maximum amount of

compensation the broker would earn (based on the loan's interest rate

and points). Under the contract, the broker would also disclose the

components of its compensation including the direct fees to be paid to

the broker by the borrower and the potential maximum amount of indirect

compensation to be received by the broker from a lender providing

mortgage loan funds.

Because compensation to the broker may differ under various

combinations of rates and points, the contract would also advise the

borrower that the broker has information on other loans with different

combinations of rates and points which the broker will display for the

borrower. (HUD will facilitate the development of software to help

brokers provide this information.) The broker will give the borrower a

contract or a contract amendment covering each type of loan product for

which the borrower may apply. The contract also requires that the

broker provide its State license or other identification number in

those States that require licenses.

For those transactions in which mortgage broker contracts are

entered into and adhered to, and other requirements of the rule are

satisfied, the direct fees received from the borrower, as well as the

indirect fees paid to the broker from a lender for the transaction,

will be covered by a ``qualified safe harbor'' and presumed to be legal

and permissible under section 8 of RESPA. The presumption of

permissibility and legality would not apply, however, if one or more of

the requirements for the safe harbor is not met. Moreover, even if all

of the requirements for the safe harbor are met, the presumption may be

rebutted if the total compensation does not pass a test that will be

established by HUD through this rulemaking and incorporated into the

final rule. There are numerous possibilities for such a test that could

result from this rulemaking, including defining the outer boundaries of

permissible or legal total compensation in terms of ranges or amounts

of dollars that could vary based on the size of a loan or other

factors; a test comparing the total compensation for a loan to the

total compensation for similar loans by mortgage brokers and lenders; a

test establishing the parameters of permissible and impermissible

compensation based upon plain and straightforward criteria; or such

other test or tests that would provide a clear line between

compensation presumed legal and compensation that would not enjoy such

presumption. Any test established through this rulemaking will allow

brokers, lenders, and consumers alike to determine with certainty

whether the total compensation to a broker is or is not legal. HUD is

requesting comments from the public on an appropriate test or tests.

Mortgage brokers that fail to enter into and adhere to the contract,

and fail to meet the other requirements in the rule, will be presumed

to be in violation of section 8 of RESPA. This presumption can be

overcome if the total compensation is reasonably related to the value

of the goods or services provided.

DATES: Comment Due Date: Deadline for comments on this proposed rule,

including comments on the proposed information collection requirements:

December 15, 1997.

ADDRESSES: Interested persons are invited to submit comments regarding

this proposed rule to the Rules Docket Clerk, Office of General

Counsel, Room 10276, Department of Housing and Urban Development, 451

Seventh Street, SW, Washington, DC 20410-0500. Communications should

refer to the above docket number and title. Facsimile (FAX) comments

are not acceptable. A copy of each communication submitted will be

available for public inspection and copying between 7:30 a.m. and 5:30

p.m. weekdays at the above address.

HUD also invites interested persons to submit comments on the

proposed information collection requirements of this proposed rule.

Comments should refer to the above docket number and title, and should

be sent to the Office of Information and Regulatory Affairs, Office of

Management and Budget, Attention: Desk Officer for HUD, Washington, DC

20503.

FOR FURTHER INFORMATION CONTACT: David R. Williamson, Director, Office

of Consumer and Regulatory Affairs, Room 9146, Department of Housing

and Urban Development, Washington, DC 20410; telephone (202) 708-4560;

or (for legal questions) Kenneth A. Markison, Assistant General Counsel

for GSE/RESPA, or Grant E. Mitchell, Senior Attorney for RESPA, Room

9262, Department of Housing and Urban Development, Washington, DC

20410; telephone (202) 708-1550. (These are not toll free numbers).

Persons with hearing or speech impairments may access this number via

TTY by calling the Federal Information Relay Service at (800) 877-8339,

which is a toll-free number.

SUPPLEMENTARY INFORMATION:

I. Introduction

In 1974, when the Real Estate Settlement Procedures Act (RESPA) (12

U.S.C. 2601-2617) was first enacted, the housing finance delivery

system was very different than it is today. Much of today's technology

and many of its lending sources and financing mechanisms did not exist.

The secondary market for mortgage loans was still undeveloped, the

present variety of loan products were rarely available (including the

``no fee, no point'' loan), and there were few types of providers of

mortgage financing. Those few that were known as mortgage brokers

generally operated differently than many mortgage brokers operate

today. Today, mortgage brokers reportedly arrange financing for nearly

half of all home mortgages. Some brokers serve as agents and

fiduciaries of borrowers and others simply serve as conduits to provide

borrowers mortgage funds as do other mortgage loan providers (such as

mortgage bankers, thrift institutions, credit unions, and banks).

Late in 1992, HUD codified a previous legal opinion that mortgage

brokers must disclose to borrowers direct and

[[Page 53913]]

indirect fees that brokers received at settlement (November 2, 1992; 57

FR 49600). In 1995, as a result of concerns that this requirement

placed mortgage brokers on an unequal footing with other mortgage loan

providers and that information on indirect fees was confusing to

borrowers, HUD issued a proposed rule (September 13, 1995; 60 FR 47650)

to obtain the public's views on the disclosures of broker fees and on

the legality of certain indirect fees to brokers from lenders (which

were referred to in that rule as ``wholesale lenders'' and are referred

to simply as lenders in this proposed rule). Shortly afterwards, HUD

embarked on a negotiated rulemaking on these subjects (see notices

published on October 25, 1995 (60 FR 54794) and December 8, 1995 (60 FR

63008)).

The 1995-1996 rulemaking activities on mortgage broker fees did not

result in a final rule. Nonetheless, these prior efforts informed HUD

and helped shape today's proposal. The earlier activities resulted in a

clear consensus that there is confusion in the minds of consumers on

the functions of mortgage brokers and the sources of their fees. This

confusion may translate into a borrower failing to compare services and

fees and thereby paying higher settlement costs. The rulemaking

activities also indicated that HUD should consider which mortgage

broker fees are or are not permissible, and/or consider establishing a

regulatory framework for disclosure and a safe harbor for fees. Recent

judicial action has further underscored the need for guidance from HUD.

For their services, mortgage brokers may receive ``indirect fees''

from lenders and/or direct fees from borrowers. Indirect fees to

mortgage brokers are called a variety of terms, including ``volume

based compensation,'' ``servicing release premiums,'' ``overages,'' or

``yield spread premiums (or differentials).'' This last term, ``yield

spread premiums (or differentials),'' has been used to refer to that

portion of the price that a lender would pay a mortgage broker for a

loan at a particular rate and point combination; this type of

compensation has been particularly controversial. In specific

transactions, indirect fees may comprise a large part or even all of

the compensation to mortgage brokers for services. Mortgage brokers

indicate that various financing options and products available to

borrowers, including ``no fee, no point'' loans, depend for their

feasibility on the payment of indirect fees by lenders.

Several lawsuits have been brought recently seeking class action

certification that are based in whole or in part on the theory that

certain of the fees paid by lenders to mortgage brokers, particularly

from lenders, are fees for the referral of business in violation of

section 8 of RESPA. In early 1997, two Federal district courts

considered cases involving mortgage broker fees and reached different

conclusions. One held initially that indirect fees to mortgage brokers

in the form of ``yield spread premiums'' violated section 8(a) of RESPA

as referral fees.1 The other court held that a payment for a

loan above market was permissible under section 8(c) of RESPA as

payment for a ``good.'' 2 In June 1997, two other Federal

district courts concluded that yield spread premiums (or differentials)

were not per se violations of RESPA and therefore refused to certify

class actions on this issue.3

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\1\ Mentecki v. Saxon Mortgage, No. 96-1629-A, slip op. (E.D.

Va. Jan. 10, 1997). However, subsequently, in an order and opinion

dated July 11, 1997, the court refused to certify the class.

\2\ Culpepper v. Inland Mortgage Corp., 953 F.Supp. 367 (N.D.

Ala. 1997).

\3\ Barbosa v. Target Mortgage, No. 94-1938, U.S.D.C., Southern

District of Florida, Martinez v. Weyerhauser Mortgage, No. 94-160,

U.S.D.C., Southern District of Florida, Monoz v. Crossland Mortgage

Company, Civil Action No. 96-12260, U.S.D.C. for the District of

Massachusetts.

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HUD has never taken the position that yield spread premiums or any

other named class of back-funded or indirect fees are per se legal. The

Illustrations of the Requirements of RESPA, contained in the 1992 RESPA

rule and codified as Appendix B to 24 CFR part 3500, specifically

listed ``servicing release premiums'' and ``yield spread premiums'' as

fees to be itemized on the HUD-1 Settlement Statement. More recently,

on June 11, 1997 (62 FR 31982), HUD issued a revised Settlement Costs

Booklet. In that booklet, HUD explained to the borrower: ``Your

mortgage broker may be paid by the lender, you as the borrower, or

both.'' Both of these issuances recognized how settlement service

business is commonly transacted, but neither provision was intended to

create a presumption of per se legality of any such fees, because HUD

does not view the name of the fee as the appropriate issue under RESPA.

The RESPA issue is whether the total compensation to a broker in a

particular covered transaction is or is not reasonably related to the

value of the goods furnished or services performed. If the

compensation, or a portion thereof, is not reasonably related to the

goods furnished or the services performed, there is a compensated

referral or an unearned fee in violation of section 8(a) or 8(b) of

RESPA, whether it is a direct or indirect payment.

This proposed rule seeks to address these matters by providing a

framework for furthering consumer understanding of mortgage broker

functions and fees. This framework will allow brokers to continue to

offer borrowers beneficial loan products, so long as the broker's

compensation is consistent with RESPA's requirements. In carrying out

this purpose, this proposed rule remains true to and preserves RESPA's

enduring consumer protections against unearned fees. Such fees only

serve to increase the costs of homeownership.

Under this proposed rule, the Secretary of HUD proposes to

establish a new mortgage broker contract to provide essential

information to consumers concerning the functions and compensation of

mortgage brokers. This contract is to permit consumers to understand a

broker's functions and fees before becoming obligated to use the

broker's services. To maximize use of this contract in brokered

transactions, the rule would provide that when a broker enters into the

contract prescribed under the rule, and meets other criteria designed

to protect the consumer, the direct fees paid by the borrower and the

indirect fees paid to the broker in the transaction would be presumed

to be legal and permissible under section 8 of RESPA. In such cases the

fees will fall within a ``qualified safe harbor.'' The presumption of

permissibility and legality will not apply, however, if one or more of

the requirements for the safe harbor is not met. Moreover, even if all

of the requirements for the safe harbor are met, the presumption may be

rebutted if the total compensation does not pass a test to be

established by HUD. The purpose of the test is to distinguish between

those fees that are acceptable under section 8 of RESPA and those that

are not. A major purpose of soliciting public comments under this

rulemaking is to assist HUD in developing this test, which will be

established in the final rule. Any test to be incorporated into the

final rule must allow brokers, lenders, and consumers to determine with

certainty whether total compensation to a broker in a loan transaction

is or is not legal. Compensation outside of the safe harbor is presumed

to violate section 8, but this presumption can be overcome if the total

compensation is reasonably related to the value of the goods or

services provided.

This preamble begins with a background discussion of the various

roles and functions of mortgage brokers today, how mortgage brokers

originate

[[Page 53914]]

loans, how they are compensated, and how RESPA's prohibitions and

disclosure requirements apply to their fees. Following this background

discussion, this preamble discusses the comments and information

learned through HUD's prior regulatory initiatives on this subject--the

1995 proposed rule and the 1995-1996 negotiated rulemaking--which

helped shape today's proposal. Finally, this preamble describes and

explains the provisions of this proposed rule.

The regulatory record, as well as recent differences in legal

interpretation of these issues in the courts, exemplify that this

subject involves difficult and contentious issues that are not easy to

resolve. This proposed rule seeks to move beyond this controversy to a

fair resolution consistent with applicable law. Any proposal on this

subject will be controversial. This proposal, however, is an attempt to

take a fair and balanced approach to competing interests. Public

comment on this rule will be critically important to refining this

approach and formulating a final rule that will be consistent with

RESPA's purpose, that will be workable in the market place, and that

will address the financing needs of Americans.

In crafting a final rule, the Secretary will be guided by the

following principles:

1. Protect consumers while recognizing the settlement services

industry is changing. Although the settlement services industry is

changing, RESPA's purposes--protecting consumers against inflated,

burdensome settlement costs through meaningful disclosure and its

prohibition against unearned fees--are as important today as when the

statute was first enacted.

2. Include meaningful and timely disclosures to consumers.

Consumers must have full information on settlement services provided

and fees received for these services at a time when they can make

meaningful choices. Clear, concise disclosures ensure that consumers

are not misled about the role settlement service providers play in

mortgage transactions and encourage consumers to comparison shop.

3. Protect against illegal fees; disclosure does not make illegal

fees legal. While there may be debate about RESPA's specific

applicability to mortgage broker fees, HUD cannot and will not sanction

fees that are illegal under RESPA. Illegal and exorbitant payments for

settlement services make the dream of homeownership more difficult for

families to achieve.

4. Encourage innovative products to aid homeownership. Requirements

established under RESPA should not impede the availability of

innovative financing products, such as ``no fee, no point'' loans. If

properly understood, these products can expand choice and lessen the

costs of homeownership.

5. Not impede lending to underserved areas and borrowers.

Requirements established under RESPA should not impede the efforts of

settlement service providers to offer beneficial, reasonably priced

services to underserved areas and borrowers.

6. Involve consumer and mortgage industry groups. HUD must give

utmost attention in the rulemaking process to the comments of those

affected by RESPA's requirements--including representatives of

consumers and regulated industries--in fashioning an effective,

workable regulatory structure under the law.

7. Provide clear rules for affected industries and consumers. Rules

developed to implement RESPA's requirements must provide clear and

certain guidance to the settlement services industry and consumers

alike. Predictability in HUD's regulation will encourage innovation and

discourage violations.

II. Background

On November 2, 1992 (57 FR 49600), HUD issued a rule revising

Regulation X (24 CFR part 3500), the regulations interpreting RESPA.

While primarily addressing other issues, the November 2, 1992 rule also

codified certain previous informal interpretations of HUD and attempted

to deal with changes in the real estate settlement services business

since the original RESPA rule was issued in 1976. In particular, the

1992 rule defined the term ``mortgage broker'' since, by 1992, mortgage

brokers were initiating a large proportion of the mortgage loans made.

The rule required the disclosure of all fees, direct and indirect, to

mortgage brokers at settlement, thereby codifying a 1992 opinion of

HUD's General Counsel. Under the rule, payments to other loan sources

following settlement were exempt from disclosure as ``secondary

market'' transactions. As indicated above, largely because of concerns

expressed about this disparity, on September 13, 1995 HUD issued a

proposed rule (60 FR 47650) (1995 proposed rule) offering alternative

approaches to disclosure of mortgage broker fees and fees to other

lenders. Subsequently, after public notice, (60 FR 54794 (October 25,

1995) and 60 FR 63008 (December 8, 1995)), HUD conducted a negotiated

rulemaking on this subject from December 1995 to May 1996. Although the

negotiation process did not lead to consensus on a final rule, it was

particularly useful in informing HUD and other participants on the

roles and functions of mortgage brokers, and clarifying compensation

and disclosure issues.

A. The Varied Roles of Mortgage Brokers in Lending

Under the 1992 rule, HUD defined a mortgage broker as ``a person

(not an employee of a lender) who brings a borrower and a lender

together to obtain a federally-related mortgage loan,'' and who renders

settlement services.4 In its 1995 proposed rule, HUD

categorized mortgage brokers as a type of ``retail lender,'' which was

identified as the entity that serves as an intermediary between the

consumer and the ``wholesale lender.'' 60 FR 47650-47651. The proposed

rule identified the ``wholesale lender'' as the entity purchasing or

servicing the loan. 60 FR 47651.5

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\4\ HUD issued a February 10, 1994 rule (59 FR 6506) that

clarified that an ``exclusive agent of a lender'' as well as an

employee of a lender were not included in the definition of mortgage

broker.

\5\ This proposed rule has generally abandoned the use of the

terms ``retail lender'' and ``wholesale lender'' inasmuch as HUD

concluded that neither created clarity for the consumer. This

proposed rule uses the term ``lender'' (rather than referring to

``wholesale lender'') and ``retail lender,'' except when discussing

provisions of earlier rulemakings that use the terms.

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Today there are two main types of mortgage brokers--those that

represent the borrower and those that do not. Mortgage brokers may fill

one role in one transaction and a different role in another. The first

type of mortgage broker represents the borrower and generally has an

agency relationship with, and a fiduciary duty to, the borrower. This

type of broker has two variants: a mortgage broker that does not

receive fees from any source other than the consumer, and a mortgage

broker that does receive fees from a source other than the consumer,

namely, the lender. An agency relationship may arise under State law or

may be created by agreement between the mortgage broker and borrower.

Although State law is largely undeveloped in this area, in some States

mortgage brokers may be found to have a fiduciary responsibility to the

borrower even in the absence of a contract provision.

The second type of mortgage broker does not represent the borrower.

This type of mortgage broker makes mortgage loans available to

borrowers either from one or a number of sources of funds with which

the mortgage broker has a business relationship. This type of

[[Page 53915]]

mortgage broker is not the borrower's agent; rather, brokers of this

type present themselves as entities that try to sell borrowers mortgage

loans as would other mortgage loan providers in the market. If this

type of mortgage broker only makes mortgage loans available from one

source of funds, the mortgage broker may or may not be functioning as

the lender's agent.

B. Differing Methods of Mortgage Brokers in Originating Mortgage Loans

Some mortgage brokers process loans and close loans in their own

names. However, at or about the time of settlement, they transfer these

loans to lenders that simultaneously advance funds for the loans. This

transaction is known in the lending industry as ``table funding.'' In

table-funded transactions, the mortgage broker does not furnish the

capital for the loans. Instead the lender provides the capital and,

immediately after the loan is consummated, the mortgage broker delivers

the loan package to that lender, including the promissory note,

mortgage, evidence of insurance, and assignments of all rights the

mortgage broker held.

In some transactions, mortgage brokers originate loans that are

closed in the mortgage brokers' names, fund the loans temporarily using

their own funds or a warehouse line of credit, and sell the loans after

closing. These mortgage brokers function similarly to mortgage bankers,

but they do not service loans.

Still other mortgage brokers function purely as intermediaries

between borrowers and lending sources. They originate loans by

providing loan processing and arranging for the provision of funds by

lenders. The loans are closed in the names of the funding lenders.

C. Mortgage Broker Compensation

Compensation for the services of mortgage brokers frequently comes

from fees paid by the borrower.

Compensation may or may not also come from ``indirect'' fees paid

by the lender providing the mortgage loan funds. Frequently, mortgage

brokers offer the following payment methods for the fees or points the

borrower pays directly: (1) The borrower may pay from his or her own

funds at closing, (2) the mortgage loan amount may be increased to

finance the mortgage broker fees or points (which increases the amount

the borrower borrows), or (3) some combination of (1) and (2).

Frequently, mortgage brokers offer payment options that enable the

borrower to pay lower fees and points, or even no fees and/or points,

in exchange for a higher interest rate, or higher points and fees for a

lower interest rate. If the borrower pays lower fees and points and

agrees to a higher interest rate, then the lender will pay the mortgage

broker a fee that reflects the higher interest payments the lender will

receive from the borrower. In other words, indirect fees paid by

lenders to mortgage brokers are largely based on the interest rate of

the loan entered into by the borrower and the amount of points and

direct fees paid by the borrower. Typically, one or more times a day,

lenders set prices that they are willing to pay to mortgage brokers for

loans delivered to them. The price to be paid for a loan is generally

expressed as a percentage of the loan amount. These prices are based on

the interest rate of the loan arranged by the mortgage broker and the

points and fees for the loan as compared to the price (a combination of

an interest rate and points) that the lender would purchase the loan

for that day.

The price that the lender will pay is, in turn, based on the value

of the loan in the secondary mortgage market (i.e., the market price).

Generally, the greater the difference between the rate a loan is

entered into with the consumer and the market price for the loan, the

greater the total compensation that will be paid to the broker. The

price may also reflect factors such as the type of loan, the ``lock-

in'' period, and the creditworthiness of the borrower. The price that

the lender pays the mortgage broker, therefore, is based on the

differential between the combination of rate and points that is the par

or market rate for a loan at a given time, and the combination of rate

and points at which the loan is entered into with the borrower. The

lender may also make additional payments to the mortgage broker at or

after settlement attributable to the number of loans provided over a

given period. These additional payments constitute a ``volume-based

discount.''

The following represents an example of the fee structure of a

typical 30-year fixed rate loan involving a mortgage broker:

----------------------------------------------------------------------------------------------------------------

Rate available from lender to mortgage Price charged by mortgage broker to

broker* (rate plus points) borrower* (rate plus points) Broker's total

---------------------------------------------------------------------------------------- compensation*

Rate (percent) Points Rate (percent) Points

----------------------------------------------------------------------------------------------------------------

8.00................ 2.00, paid to broker. 8.00............... None................. 2.00 points.

7.75................ 1.00, paid to broker. 7.75............... 1.00................. 2.00 points.

7.50................ None................. 7.50............... 2.00................. 2.00 points.

7.25................ 1.00, paid by broker. 7.25............... 3.00................. 2.00 points.

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*These rates and fees are offered for illustrative purposes only, not as an indication of HUD's approval of the

legality of any particular fee.

D. Views on Mortgage Broker Compensation

The legality of indirect fees to mortgage brokers from lenders has

been the subject of much debate and recent litigation. Section 8(a) of

RESPA prohibits compensation for the referral of settlement service

business; section 8(b) prohibits unearned fees. Section 8(c)(2) of

RESPA, however, provides that payment may be made for ``goods or

facilities actually furnished or for services actually performed.''

6

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\6\ With respect to a mortgage broker that is the agent of a

lender, section 8(c)(1) may also apply to the analysis. Section

8(c)(1) provides that nothing in section 8 shall be construed as

prohibiting the payment of a fee by a lender to its duly appointed

agent for services actually performed in the making of a loan. See

also 24 CFR 3500.14(g)(1)(iii).

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Some have argued that any indirect fees paid by lenders to mortgage

brokers are simply referral fees in violation of section 8(a) and 8(b)

of RESPA. Others have argued that indirect fees violate section 8(a)

and 8(b) and are not permitted under section 8(c)(2) except when they

reflect the actual cost for the provision of such services, allowing

margins for reasonable profit. Still others have argued that to the

extent fees are reasonably related to the value of the goods,

facilities, and services provided by mortgage brokers to lenders or

borrowers, they are permitted under section 8(c)(2) of RESPA.

Those taking the position that fees are permitted if they are

reasonably related to the value of the goods, facilities, and

[[Page 53916]]

services have in the past disagreed on how to apply this test. Some

argue that the test should include consideration of the value of the

good (i.e., the mortgage loan) to the lender, subsuming or in addition

to the value of the services performed and facilities provided by the

broker (e.g., providing a retail outlet for the loan). Others would

only allow consideration of the value of the services performed and

facilities provided, arguing that the loan is not a ``good,'' or that

the mortgage broker does not provide a loan, only a referral. Others

would only allow consideration of the value of the services and

facilities to the borrower, not their value to the lender; under this

approach yield spread premiums may be permissible if they are solely

for the benefit of, and are effectively regarded as owned by the

borrower, e.g., when these amounts serve only to offset or decrease the

borrower's closing costs. Finally, some argue that the bringing

together of the borrower and the lender is a service, not a referral,

and therefore may be compensated.

Among those who agree that fees are permitted under section 8(c)(2)

of RESPA if they are reasonably related to the value of the goods,

facilities, and services provided, there has been disagreement over how

to value the goods, facilities, and services. Some suggest that the

standard for determining the price of the good should be the price that

the market would bear; others criticize this approach because it does

not separate out any price that the market may pay for a referral from

the price of goods, facilities, and services provided. Some suggest

that the standard should be the actual cost for the provision of the

goods, facilities, and/or services provided, allowing specific margins

for reasonable profit; others criticize this approach as contrary to

RESPA's legislative history, asserting that this was not intended to be

a rate-setting statute. See S. Rep. No. 93-866, at 3-4 (1974),

reprinted in 1974 U.S.C.C.A.N. 6546, 6548-49. Others maintain that HUD

must at all times retain some degree of authority over the aggregate of

payments to mortgage brokers to deter exorbitant total fees. HUD has

been mindful of this debate in shaping this proposed rule.

E. Disclosure of Mortgage Broker Fees

The 1992 rule required the disclosure of all compensation paid to

lenders and mortgage brokers as part of the settlement transaction.

This was a codification of HUD's position under sections 4 and 5 of

RESPA (12 U.S.C. 2603-2604) that all charges imposed on borrowers at

settlement must be disclosed.

This meant that lenders and mortgage brokers both had to disclose

direct compensation (i.e., fees and points paid by borrower). In

addition, when mortgage brokers were acting as intermediaries or were

using table funding, they had to disclose their indirect fees from

lenders, which were shown as ``P.O.C.'' (paid outside of closing) on

the HUD-1 or HUD-1A settlement statement. In contrast bankers, mortgage

bankers and thrifts, as well as mortgage brokers that funded loans with

their own funds or a warehouse line of credit for which they were

responsible, did not have to disclose the compensation they might

receive for a subsequent sale of mortgage loans in the secondary

market.

The 1992 rule therefore had the effect of treating mortgage brokers

serving as intermediaries or using table funding differently from

brokers who used a warehouse line of credit or their own funds. The

reasoning has been that mortgage brokers who used a warehouse line of

credit or their own funds were acting as lenders and transferring their

loans in the secondary market. A bona fide transfer of a loan

obligation by them after the initial funding is a secondary market

transaction exempt from RESPA. 24 CFR 3500.5(b)(7). RESPA does not

require disclosure of fees paid in secondary market transactions. In

determining what constitutes a bona fide transfer, HUD considers the

real source of funding and the real interest of the funding lender. Id.

The 1992 rule's requirements for disclosing fees on the Good Faith

Estimate (GFE), HUD-1, and HUD-1A also made no distinction between

those mortgage brokers that represent themselves as agents of the

consumer and those that function like other retail lenders providing

loans from various lending sources available to them.

III. Re-Examination of Disclosure of Mortgage Broker Fees

As indicated above, complaints about the difference in disclosure

requirements for mortgage brokers serving as intermediaries or using

table funding, as compared to disclosure requirements applicable to

other loan providers, led HUD to re-examine whether, and if so to what

extent, the disclosure of indirect fees, also known as ``back-funded

fees,'' paid to mortgage brokers should continue to be required under

section 4 of RESPA. For this purpose, HUD issued the 1995 proposed

rule.

In the 1995 proposed rule, HUD sought comments on its requirements

(reflected in the 1992 rule) that disclosure of ``all charges imposed

on the borrower'' shall include fees paid to the mortgage broker by the

``wholesale'' lender, because all charges are ultimately borne by the

borrower. HUD also indicated it would consider how all indirect fees

should be treated under section 8 of RESPA. HUD sought comments

regarding the related issue of whether ``volume-based compensation'' is

legal under RESPA and whether it should be required to be disclosed.

The 1992 rule also reiterated HUD's position that ``a bona fide

transfer of a loan obligation in the secondary market is not covered by

RESPA and this part [24 CFR part 3500], except as set forth in section

6 of RESPA and Sec. 3500.21 [mortgage servicing transfers].'' The 1995

proposed rule offered various alternative approaches for determining

what does or does not constitute a secondary market transaction.

A. Alternative Regulatory Structures

In the 1995 proposed rule, HUD offered six alternative approaches

to regulating the disclosure of fees paid to mortgage brokers (60 FR

47650, 47653-54) as follows:

Alternative 1

(1) Retaining the current RESPA regulation's approach of requiring

disclosure of both direct and indirect fees at settlement for

transactions not in the secondary market; (2) classifying mortgage loan

sales after settlement as ``secondary market transactions'' not

requiring disclosure of direct or indirect fees and exempt from RESPA,

including its prohibitions against kickbacks and referral fees; (3)

continuing to require disclosure of direct and indirect fees for table-

funded transactions and making such transactions subject to RESPA (the

loan sale is not a secondary market transaction, it is contemporaneous

with and not after settlement); and (4) requiring disclosure of direct

and indirect fees for loans closed in the name of the wholesale lender

(not involving a sale).

Alternative 2

(1) Continuing to require disclosure of direct and indirect fees at

settlement for transactions not in the secondary market; (2)

classifying any mortgage loan sale--before, contemporaneous with, or

after settlement--as a ``secondary market transaction''; (3) requiring

disclosure of direct fees at settlement but exempting the sale at

settlement of a table-funded mortgage loan from RESPA as a ``secondary

market transaction,'' and making unnecessary the disclosure of

``indirect

[[Page 53917]]

fees'' associated with the table-funded loan sale; and (4) requiring

disclosure of direct and indirect fees for loans closed in the name of

the wholesale lender (not involving a sale).

Alternative 3

(1) Continuing to require disclosure of direct and indirect fees at

settlement for transactions not in the secondary market; (2)

classifying a sale of a mortgage loan following the date of first

accrual (the date the first payment is due from the borrower) as a

``secondary market transaction''; (3) requiring disclosure of direct

and indirect fees and applying other RESPA restrictions to table-funded

transactions (the loan is sold at settlement, before the first accrual

date); and (4) requiring disclosure of direct and indirect fees and

applying other RESPA requirements to loans closed in the name of a

wholesale lender (not involving a loan sale). Under Alternative 3,

RESPA disclosure and other restrictions would cover more loan sales

transactions (before the first accrual date) between retail lenders and

wholesale lenders in addition to sales in table-funded transactions.

Alternative 4

(1) Requiring disclosure only of direct (not indirect) fees at

settlement for transactions not in the secondary market (since indirect

fees need not be disclosed, the secondary market exemption determines

whether other RESPA prohibitions apply); (2) continuing to classify

mortgage loan sales as ``secondary market transactions'' not subject to

RESPA only if they occur after settlement; (3) requiring disclosure

only of direct (not indirect) fees for table-funded transactions, such

transactions would not be ``secondary market transactions'' and would

be subject to RESPA (the loan sale is contemporaneous with and not

after settlement); and (4) requiring disclosure of only direct (not

indirect) fees for loans closed in the name of a wholesale lender with

such transactions subject to RESPA's other restrictions.

Alternative 5

(1) Requiring disclosure only of direct (not indirect) fees at

settlement; (2) classifying a mortgage loan sale, at any time, even

simultaneously with loan funding (as in a table-funded transaction) as

a secondary market transaction; (3) requiring disclosure of direct fees

at settlement but exempting the sale at settlement of a table-funded

mortgage loan from RESPA as a ``secondary market transaction''; and (4)

requiring disclosure of only direct (not indirect) fees for loans

closed in the name of the wholesale lender (not involving a sale) with

such transactions subject to RESPA's other restrictions.

Alternative 6

(1) Requiring disclosure only of direct (not indirect) fees at

settlement; and (2) classifying a loan sale as a secondary market

transaction only if it occurred after the first accrual date. Under

Alternative 6, RESPA disclosure and other requirements would cover more

transactions than are currently covered, except that indirect fees

would not have to be disclosed.

B. Overview of the Public Comments

HUD received 836 comments in response to the 1995 proposed rule.

Most commenters were mortgage brokers or employees of brokerage

organizations, although many were lenders. Consumer representatives

also submitted comments. HUD also received comments from credit unions,

banks, attorneys, or other persons and organizations in real-estate-

related occupations.

Several national organizations submitted comments--including

counsel for the National Association of Mortgage Brokers (NAMB), the

Mortgage Bankers Association (MBA), the Real Estate Services Providers

Council (RESPRO), the National Association of Realtors (NAR), the

National Association of Federal Credit Unions (NAFCU), the American

Bankers Association (ABA), the National Home Equity Mortgage

Association, the Title I Home Improvement Lenders Association, and the

Independent Bankers Association of America (IBAA). Additionally,

several State associations representing mortgage brokers submitted

comments. The Board of Governors of the Federal Reserve System, the

Federal National Mortgage Association (Fannie Mae), and the Federal

Home Loan Mortgage Corporation (Freddie Mac) also commented.

C. Summary of Public Comments on Alternative Regulatory Structures

The preponderance of commenters, primarily industry members and

representatives, favored Alternative 5, requiring only disclosure of

direct fees and classifying a transfer of a table-funded loan as a

secondary market transaction. The NAMB characterized the fees in

question as ``fees in the nature of secondary market fees (e.g.,

service release premiums, excess yield differentials or volume

discounts).'' NAMB also argued strenuously that these fees were

legitimate and earned, and that their disclosure should not be required

because ``they are not fees, points, or charges collected from the

mortgagor or seller.''

NAMB and individual mortgage brokers urged that fees of the kind at

issue were essential to the continued competitiveness of mortgage

brokerage firms, and that their elimination would stifle competition in

the mortgage lending industry. While their disclosure to the affected

consumer was thought by these commenters to be unnecessary, a

determination of their legality was the commenters' paramount concern.

Many industry commenters expressed their belief that HUD needed to

declare the legitimacy of these fees under RESPA.

The Board of Governors of the Federal Reserve System expressed some

concern regarding HUD's proposal to eliminate disclosure of indirect

fees paid to mortgage brokers, as that might impact on its

determination of coverage under section 32 of the Riegle Community

Development and Regulatory Improvement Act of 1994 (Pub. L. 103-325;

approved September 23, 1994). That section prescribes special rules for

high cost mortgage loans, loans which have rates and fees above a

certain level. The Board, however, subsequently adopted a regulation

that based its calculation on direct (borrower-paid) fees only. Under

this circumstance, the Board's originally expressed concern is no

longer relevant.

Most, but not all, of the comments adverse to positions taken by

mortgage brokers and brokers' organizations came from consumer groups.

Five consumer or legal service organizations responded to the proposed

rule. Commenting consumer organizations, taking a different view than

mortgage brokers, favored Alternative 1, the status quo, among the

offered options. Additionally, however, they asked for further

strengthening of the existing regulation to require greater disclosure,

to cover a larger array of transactions, and to outlaw certain lender

payments. Some consumer organizations characterized certain lender

payments to mortgage brokers as ``kickbacks,'' impermissible under

RESPA whether or not they are disclosed. These commenters urged HUD to

issue a blanket prohibition against certain lender-paid fees.

A scattering of industry commenters also supported Alternative 1,

the status quo. These included: Travelers Group, New Jersey Savings

League, and First Commerce Corporation. These commenters took the view

that the current RESPA regulation resulted in the most informative

disclosure to consumers while still allowing bona

[[Page 53918]]

fide secondary market transactions to proceed outside the scrutiny of

consumers or others involved in the settlement.

Some other industry commenters supported Alternative 2 (continuing

to require disclosure of indirect fees, but expanding the definition of

``secondary market transaction''). These included: McDonnell Douglas

West Federal Credit Union, Comerica Inc., The Money Store of

Sacramento, California, and the Michigan Bankers' Association.

Similarly, Alternative 4 (which required disclosure only of direct

fees, but with no change in the current definition of secondary market

transaction) attracted only a few commenters. Four commenters,

including the MBA, opted for this structure. The MBA said it favored a

``modified'' Alternative 4. It disagreed that in a table-funded

transaction a mortgage loan sale occurs at settlement. Because these

sales ``effectively occur after settlement,'' MBA said, it favored

Alternative 4 with the recommendation that the final rule conform to

MBA's understanding of the table-funding issue.

American Federal Bank of Greenville, SC, PNC Mortgage Corporation

of Vernon Hills, IL, and a PNC-affiliated company, The Home Mortgage

Network, also favored Alternative 4. PNC Mortgage Corporation went on

to suggest that, despite favoring the elimination of a recitation of

``indirect'' fees as the current rule requires, it would be useful for

the RESPA regulation both to clarify that other forms of compensation

are permitted and to require actual notice to borrowers when the retail

lender is being paid ``servicing release premiums'' or ``yield spread

premiums.''

There were no industry commenters that favored Alternatives 3 or 6.

One consumer organization, Illinois Consumer Justice Council, Inc.,

supported, in essence, Alternative 3, although the commenter advocated

outright prohibitions on specific forms of lender compensation to

mortgage brokers.

Both Fannie Mae and Freddie Mac (Government-Sponsored Enterprises

or GSEs) cautioned against the adoption, without clarifications, of

Alternatives 3 or 6. At the least, Freddie Mac said, ``further

elaboration of the concept'' would be necessary were HUD to adopt a

definition providing that only mortgage loan sales that occur

relatively long after settlement would be regarded as exempt secondary

market transactions.

Similarly, Fannie Mae pointed out that narrowing the secondary

market exemption could hamper the speed of mortgage financing and

adversely affect mortgage lenders' ability to take advantage of

technological innovations. Neither GSE registered an outright objection

to a narrowing of the secondary market exemption. Each made clear that

Alternatives 3 and 6 were not preferred, and, if adopted, would disrupt

current practices. Neither GSE expressed a positive preference for any

of the alternatives outlined in the proposed rule.

On the issue of volume-based compensation, the commenters were

divided. Commercial Credit advocated permitting the payment of volume-

based fees. NAMB specifically objected to HUD's questioning the

``propriety of paying volume discounts under RESPA.'' NAMB urged that

such payments were a standard industry practice, that the issue should

not be addressed ``piecemeal,'' but that HUD should ``articulate a

simple standard of what may be paid.''

American Federal Bank, PNC Mortgage Corporation, and The Home

Mortgage Network indicated that volume-based compensation should be

permitted, but that a ``general'' form of disclosure should be

required--to the effect that the retail lender ``may receive additional

compensation in connection with the transaction.'' McDonnell Douglas

West Federal Credit Union advocated disclosure of this form of

compensation to borrowers.

Michigan Bankers Association and Comerica (in identical comments)

stated that volume-based compensation could lead to loan steering.

Arguing that disclosure of such compensation was too complex a matter,

these commenters appeared to be suggesting that this form of

compensation to brokers should be prohibited altogether. In addition,

Travelers Group opposed it as being a form of kickback not tied to

actual services rendered and also said that volume-based compensation

almost always results in ``loan steering.''

IV. Negotiated Rulemaking

After issuing the 1995 proposed rule, HUD concluded that the issues

in the rulemaking might be better understood and perhaps resolved by

involving representatives of interested parties in a negotiated

rulemaking process. In appropriate circumstances, this process brings

together agency representatives with all parties substantially affected

by the subject matter in order to negotiate the terms of a needed rule.

On October 25, 1995, HUD published a Notice of Intent to Establish

a Negotiated Rulemaking Advisory Committee (60 FR 54794) to address

mortgage broker fees and volume-based compensation. HUD received nine

comments in response to the notice, most of which favored negotiated

rulemaking.

On December 8, 1995 (60 FR 63008), HUD published a notice

announcing the establishment of an Advisory Committee. HUD charged the

Advisory Committee with: (1) Determining whether the amount and nature

of indirect payments to mortgage brokers and certain other mortgage

originators should be disclosed to the consumer; and (2) resolving

whether volume-based compensation from wholesale lenders to mortgage

brokers is permissible under RESPA (and implicitly, whether other

payments from wholesale lenders to mortgage brokers are permissible, an

issue mentioned explicitly in the October 25, 1995 notice), and whether

and how the compensation should be disclosed. The notice set forth

HUD's conclusion that, in view of the degree of controversy and in the

interest of fashioning the best possible rule, the negotiated

rulemaking process offered the best means of generating information and

resolving the difficult issues involved.

The Advisory Committee was composed of parties possessing a

definable interest in the outcome of a proposed rule--representatives

of mortgage brokers, lenders, the Government-Sponsored Enterprises,

State government, and consumer advocates. In addition to HUD, the

following were members of the Advisory Committee: AARP/Legal Counsel

for the Elderly, America's Community Bankers, American Association of

Residential Mortgage Regulators, ABA, American Financial Services

Association, Citizen Action, Freddie Mac, Fannie Mae, IBAA, the MBA,

National Association of Consumer Advocates, National Association of

Federal Credit Unions, NAMB, NAR, Office of the Attorney General of the

State of Texas, RESPRO, and The Mortgage Capital Group.

A. Advisory Committee Activities and Approach

From December 1995 to May 1996, the Advisory Committee met for six

2-day negotiation sessions that were facilitated by HUD's Chief

Administrative Law Judge, Alan W. Heifetz. The Advisory Committee began

its deliberations with presentations by participants and industry

experts regarding the functioning of the mortgage lending industry. The

consumer representatives presented the group with their concerns and

their perceptions of areas in which

[[Page 53919]]

consumers were in need of increased protection. The Advisory Committee

then framed the points in question and engaged in substantive

discussion of the issues presented.

The Advisory Committee spent a large portion of its time on the

issue of the appropriate scrutiny of indirect fees under section 8.

Committee members were adamant that the starting point should be

resolution of the permissibility of indirect fees. In analyzing fees,

the participants recognized that there were different types of fees

from lenders to mortgage brokers: (1) fees reflecting payment for a

loan delivered at or near the par price, and (2) payments to a mortgage

broker for a loan delivered considerably above the par price.

While nearly all participants recognized that mortgage brokers

perform valuable services in brokering loans for consumers, they

disagreed considerably over the appropriate means of analyzing the

legality of mortgage broker fees under RESPA. One representative

initially argued that all indirect fees are illegal under section 8(a)

and 8(b) of RESPA. Other members of the Committee agreed that the

standard RESPA test would apply. As discussed above, that test provides

that although fees cannot be paid for the referral of business as

proscribed in section 8(a) and 8(b), if fees are reasonably related to

the value of the goods, facilities, and services provided, they are

permissible under section 8(c)(2) of RESPA.

The Committee attempted to find a workable formula for applying the

standard RESPA test to lender payments to mortgage brokers, but it did

not reach consensus on how to apply the test to those payments.

Advisory Committee members conferred on the options and considered

that, if the value of the services was deemed to be the appropriate

point of scrutiny, then there would be a further need to define the

proper method for determining the value of such services. Others

focused on the facilities a mortgage broker provides (which allow

lenders to function without ``bricks and mortar''), and argued the

value of these facilities should be analyzed in considering whether the

broker's compensation was reasonable. Each of these approaches received

criticism, however, as it would require establishing a level of

appropriate payment for itemized services or facilities. That task

would, however, be unworkable and inconsistent with RESPA's legislative

history against price-setting.

Some believed that the loan provided by a broker to a lender could

be regarded as a ``good'' under section 8(c)(2) with the compensation

analyzed in terms of the loan's value to the lender. That approach was

criticized, however, as undermining any meaning of RESPA's section 8,

since it would allow the lender to pay for the value of the referral as

part of the bundled value of the good.

Some suggested defining indirect fees to mortgage brokers as fees

in the secondary market outside the scope of RESPA. The Committee

addressed the possibility of altering the current definition of what

constitutes a secondary market transaction. Although various

alternatives were proposed and considered, the group could not agree on

any particular approach. Likewise, on the permissibility of particular

types of lender payments to mortgage brokers, including volume-based

compensation, the participants suggested differing interpretations of

the statute's meaning and intent, thus causing an impasse on this issue

as well.

All agreed as a general principle that exorbitant rates and points

should not be extracted from consumers and that mortgage brokers should

not be paid total compensation that greatly exceeds the comparable

compensation for comparable borrowers and loan programs. Most agreed

that it is difficult to develop a workable test for the proper amount

of this compensation. They also recognized the extent of public

confusion over the role of mortgage brokers, particularly where the

mortgage broker receives compensation from the lender. The participants

struggled with the diversity of ways mortgage brokers operate for

borrowers. For example, certain mortgage brokers act as the borrower's

agent arranging the most favorable loan for the borrower. Certain

mortgage brokers offer various loan products in a manner similar to

retail lenders. Some offer the loan products of only one lender.

Consumer advocates were particularly critical of mortgage brokers who

asserted their role to be to place loans with one of several lenders

with which they do business, yet took advantage of the consumer's

perception that they were acting as the consumer's agent, although they

were not, in fact, doing so.

The diverse views of the participants as to how mortgage brokers

function and what types of fees they receive resulted in diverse views

of the legality of the fees mortgage brokers receive and the extent to

which they should be required to disclose their fees to borrowers. Some

argued that limiting a mortgage broker acting as a retail lender to a

fee for services (and ignoring the value of the good delivered)

effectively forced the mortgage broker to act as the borrower's agent

without an indication such a step was intended by Congress in enacting

RESPA. Mortgage brokers, they argued, should be able to charge

consumers whatever price they can obtain for a loan in the market, even

if the price is above that at which the lender would have been willing

to make the loan. In a competitive market where consumers shop, they

claimed, such a broker would be limited by market competition.

On the other hand, when the broker is acting as the borrower's

agent, most agreed that the mortgage broker is obligated to shop around

for the consumer to obtain the best deal for the consumer. This kind of

mortgage broker should not be compensated by a lender based simply on

the value of the loan, most agreed, without disclosing such

compensation to the borrower.

Few agreed on what circumstances would require mortgage brokers to

serve as the borrower's agent. Most, however, concurred on the point

that a great many consumers perceive the role of a mortgage broker to

be their agent, which is different from how the mortgage brokers

perceive themselves.

There was consensus on one point: that a rule should clear up this

confusion and require that mortgage brokers inform borrowers of the

role the mortgage broker is serving early enough in the transaction to

allow the consumer to shop effectively for alternatives.

B. Advisory Committee Views on a Safe Harbor

As a result of the divisions among the negotiators concerning the

appropriate analysis, most of the participants endorsed creating a

``safe harbor'' that would exempt from section 8 fees to mortgage

brokers in circumstances in which the participants could be confident

that the consumer is adequately protected. Most of the participants

concluded that creating a safe harbor for mortgage broker fees was the

only reasonable means of allowing fee payments while ensuring the

consumer was protected. The participants, however, differed on the

specific requirements for the safe harbor. Participants suggested

differing types and levels of disclosures, depending upon the interests

and views of the proponent.

One participant favored a safe harbor involving the execution of a

binding mortgage broker contract between the mortgage broker and the

borrower. First, this mortgage broker contract would provide terms of

the relationship between the borrower and the broker. Second, the

broker would disclose direct fees, and the disclosure would

[[Page 53920]]

notify borrowers that the mortgage broker may receive additional

(indirect) fees from a lender pursuant to that transaction. Third, the

disclosure would notify the borrower that the broker does not

distribute the products of all lenders, and that the products

distributed may not represent the lowest price or the best terms

available. Fourth, the mortgage broker contract would incorporate

additional items that were required as a matter of State law.

One group of the participants proposed a safe harbor involving a

borrower-broker contract detailing all the elements of the

aforementioned proposal and adding two significant elements. First, the

contract would require the broker to disclose the maximum total

compensation (including indirect fees) it would receive from all

sources (in terms of dollars and/or percentage of total mortgage loan

amount). Second, once disclosed, this maximum amount would serve to

limit the compensation paid to the broker. A variant of this option,

proposed by another participant, would also require that the borrower

be explicitly granted the option of paying the broker directly, either

through points or from mortgage loan proceeds.

Another participant offered a proposal under which the broker would

disclose only the relationship of the broker to the borrower and the

broker's direct fees. Yet another participant supported establishment

of a safe harbor requiring: (1) Disclosure of the relationship between

the borrower and the broker, (2) a statement that the broker does not

offer the products of all lenders and that the products offered do not

reflect the broker's having shopped for the consumer to ensure the best

price available, and (3) disclosure of the fees from the lender and the

borrower. In addition, use of this safe harbor approach would only be

available in a competitive mortgage market in which multiple services

were not being provided by a single entity or affiliated entities.

Another participant supported a similar proposal and suggested that a

competitive market might be shown by such means as collecting

comparable advertised prices by competitors, disclosing average

national rates to the borrower, and complying with standards for ``high

cost mortgages'' under section 32 of the Riegle Community Development

and Regulatory Improvement Act of 1994 (section 103(aa) of the Truth in

Lending Act, 15 U.S.C. 1602(aa)).7

---------------------------------------------------------------------------

\7\ A ``high cost mortgage loan'' is an owner-occupied

residential mortgage loan in which the annual percentage rate of

interest (APR) will exceed by more than 10 percentage points the

yield on Treasury securities of comparable maturity. A high cost

mortgage loan is also a mortgage loan in which the total points and

fees paid by the consumer will exceed the greater of 8 percent of

the mortgage loan amount, or $400 (adjusted annually by the Federal

Reserve Board--$412 in 1996), whichever is larger. 15 U.S.C.

1602(aa); Regulation Z, 12 CFR 226.32.

---------------------------------------------------------------------------

On May 21, 1996, the Committee concluded its negotiations without

reaching consensus on a proposed rule. On July 19, 1996, the Committee

Facilitator submitted his final report on the negotiated rulemaking to

HUD. That final report summarized the negotiated rulemaking proceedings

and detailed the approaches discussed by the participants during the

negotiations. In the report, the Facilitator observed that the numerous

interests represented in the Committee conflicted and aligned along

various permutations. The report noted the Committee's inability to

reach consensus and stated that no party would be bound by discussions

or particular positions taken during the negotiations.

Although there was a failure to reach consensus, it is significant

that the Advisory Committee's deliberations resulted in almost

unanimous support for the creation of a safe harbor approach to resolve

issues relating to mortgage broker fees. This safe harbor would include

the disclosure of the mortgage broker's relationship with the borrower

and information about the mortgage broker's fees in the loan

transaction. Such a safe harbor was believed to secure a level of

consumer protection that would fulfill section 8's purpose. Indirect

fees to mortgage brokers that complied with these specific disclosure

requirements would be exempt under section 8 of RESPA. In light of the

absence of consensus on any one safe harbor approach, HUD was presented

with the task of creating acceptable criteria for a safe harbor, if it

decided to adopt that approach.

V. This Proposed Rule

Following review of all of the comments and the results of the

negotiated rulemaking, HUD is proposing a rule to encourage the use of

mortgage broker contracts that will clearly establish the role of the

mortgage broker, the mortgage broker's duties, and the mortgage

broker's compensation. This proposed rule strives to protect consumers

better by providing them the information they need to be better

shoppers and by making the information disclosed to them in the

mortgage broker contracts binding. This proposal seeks to discourage

practices that give financial incentives to mortgage brokers that offer

higher priced loans than what are generally available in the

marketplace for the particular mortgage applicant.

This proposed rule is premised on the following facts and policy

considerations:

1. Under current rules, there are reported cases in which

exorbitant payments have been made to mortgage brokers by lenders. In

these examples, the cost of the loans is significantly more than what

the consumers could have obtained from other loan providers in the

marketplace, and these additional costs have undoubtedly contributed to

foreclosures.

2. Under the current RESPA rule, consumers are not provided

sufficient information about the mortgage broker's role in the

transaction. On the other hand, consumers are sometimes overloaded with

more information about the home financing process than the consumers

can use and receive confusing information about the mortgage brokers'

fees.

3. The borrower would benefit from a useful mortgage broker

contract specifying the mortgage broker's functions and compensation so

that the borrower is not misled as to the role the mortgage broker

plays in the transaction and does not fail to comparison shop.

4. Borrowers use interest rates, points, and closing costs to shop

for mortgages. With this information, the borrower can make informed

choices about loan services, provided the borrower is also aware of the

mortgage broker's function and the extent and sources of its

compensation.

5. The disclosure of mortgage broker fees paid by the lender on the

GFE, HUD-1, and HUD-1A without further explanation is frequently

confusing to borrowers. In particular, the fact that these fees are

listed as ``P.O.C.'' (paid outside of closing) but are paid by the

lender, rather than the borrower, is confusing.

6. Mortgage brokers should agree with borrowers by contract as to

how they function, provide appropriate information about their fees,

and be required to adhere to the terms of the contract.

7. The disclosure requirement in the 1992 rule may have caused

mortgage brokers to establish warehouse lines of credit simply to avoid

the disclosure requirement, thereby incurring unnecessary costs passed

on to borrowers.

8. The industry requires certainty about the permissibility of

payment practices.

9. Fees from lenders to brokers allow the borrower to have an array

of choices in trading off interest rate and points,

[[Page 53921]]

including ``no fee, no point'' loans. The borrower actually will pay

these fees over time as reflected in the interest rate. However, if

properly understood by the borrower, this pricing mechanism can expand

choice and lessen the closing costs of loans to the homebuyer, making

homeownership more affordable and facilitating refinancings to take

advantage of lower rates.

10. Under appropriate circumstances it may be possible to recognize

a class of compensation to mortgage brokers presumed to be legal. When

establishing a class of compensation presumed legal, it is essential to

identify any compensation that should not enjoy such a presumption.

11. Mortgage brokers reportedly originate approximately half of all

mortgages. This volume of activity would not be possible if the

majority of loans obtained through mortgage brokers did not have terms

competitive with those of mortgages from other lending sources.

A. Department's Overall Approach to a Safe Harbor

This proposal offers a qualified safe harbor that affords limited

protection for fees to mortgage brokers. The mortgage broker contracts

required to qualify for the safe harbor proposed in this rule tackle

two issues that are potentially controversial concerning mortgage

broker fees: (1) How the role of the mortgage broker should be

characterized for the consumer/borrower, and (2) how the consumer/

borrower should be made aware of the total amount of compensation to

the mortgage broker. The contracts proposed under this rule require the

broker to specify whether or not the broker is acting as a

representative of the borrower to shop for a mortgage loan, or whether

the broker does not represent the borrower and serves only to arrange

loans. If the broker indicates it acts as a representative, the broker

must disclose whether or not it is receiving indirect fees from a

lender. To qualify under the safe harbor, mortgage brokers must

disclose whether the mortgage broker deals with one or more than one

lender so that the consumer can understand the extent to which the

broker will shop. 8

---------------------------------------------------------------------------

\8\ A mortgage broker that does not represent the borrower and

that deals with only one mortgage lender's products might operate,

for example, in an affiliated business arrangement. A Federal

Housing Administration (FHA) correspondent could also fall in this

category.

---------------------------------------------------------------------------

The contract requires the broker to disclose the maximum amount of

compensation the broker will receive in the loan transaction,

distinguishing the fees coming from the borrower and the fees coming

from the lender. Mortgage brokers also will continue to be required to

disclose their direct fees as well as their indirect fees paid to them

by lenders on the GFE, the HUD-1, or HUD-1A in transactions covered by

the exemption.

For those transactions in which the proposed mortgage broker

contracts are entered into and adhered to, and other requirements of

the rule are satisfied, compensation to brokers will be regarded as

having been paid within a ``qualified safe harbor'' within which fees

paid to mortgage brokers from lenders will be presumed legal. This

presumption of permissibility and legality would not apply, however, if

one or more of the requirements for the safe harbor is not met.

Moreover, even if all of the requirements for the safe harbor are met,

the presumption may be rebutted if the total compensation does not pass

a test to be established by HUD and incorporated in the final rule.

When the fees do not pass this test, they are presumed to violate

section 8 of RESPA. This presumption can be overcome if the total

compensation is reasonably related to the value of the goods or

services provided. By providing that the safe harbor is ``qualified,''

HUD preserves the ability to protect consumers against illegal fees, as

determined by the test to be established in the final rule following

public comment. A qualified safe harbor will ease the difficulty and

uncertainty involved in applying section 8(a), 8(b), and 8(c)(2) to

total mortgage broker fees. HUD is specifically soliciting comments on

the elements of this test.

In order to establish the ``qualified safe harbor,'' HUD is

proposing to exercise its exemption authority under section 19(a) of

RESPA (12 U.S.C. 2617(a)) to add a new, limited exemption to RESPA's

prohibition against kickbacks and unearned fees. In addition, under

section 8(c)(5) of RESPA, the Secretary may create regulatory

exemptions for ``such other payments or classes of payments,'' after

consulting with various Federal agencies (12 U.S.C. 2607(c)(5)). The

exemption proposed is limited in that it creates a presumption of

legality for compensation that meets the requirements of the exemption.

Regarding lender payments of indirect fees, mortgage brokers and

lenders should be aware that, in addition to RESPA, they are also

subject to the requirements of the Fair Housing Act and other fair

lending laws. Discretionary pricing of loans is a major fair lending

concern of HUD and the Department of Justice because of the possibility

of disparate treatment of similarly qualified borrowers. Yield spread

premiums or servicing release fees that are consistently higher for a

minority population, for example, than they are for a similarly

qualified nonminority population could be unlawful under the Fair

Housing Act. While mathematical precision is not required between the

premiums and fees associated with borrowers grouped by racial or other

categories, the larger the differences, the closer enforcement agencies

will look for possible disparate treatment.

Monitoring of such fees by mortgage brokers and lenders can help

preclude unlawful conduct under the Fair Housing Act and other fair

lending laws. HUD itself will monitor the number and type of fair

lending complaints involving such fees and premiums upon implementation

of the final RESPA rule regarding payments to mortgage brokers, and

will, if necessary, revisit the issue if it appears that consumers are

being subjected to discrimination in this area and would benefit from

additional disclosures or additional contract terms.

For mortgage brokers meeting the requirements of the qualified safe

harbor, volume-based compensation would be presumed legal (subject to

application of the test developed for the final rule); outside of the

safe harbor, volume-based compensation will be presumed to violate

section 8(a) or 8(b) of RESPA. In making the representation regarding

the maximum amount of fees from the lender in the mortgage broker

contract, the mortgage broker is to state an amount that reflects

expected volume-based compensation for the loan.

This rule does not propose to change the secondary market line. HUD

concluded that there was little benefit to shifting the line.

B. Elements of the Safe Harbor Provision

In this proposed rule, HUD would amend 24 CFR 3500.14(g)(2) to

provide that lender payments to mortgage brokers are presumed legal and

permissible under section 8 if the following conditions are met:

1. Mortgage Broker Contracts

The mortgage broker and the prospective borrower(s) execute a

mortgage broker contract for each loan transaction. The form of the

mortgage broker contract that would be used would be set forth in

Appendix F to part 3500 to facilitate mortgage broker compliance with

the safe harbor requirements. The instructions for completing the form

would be provided with the form.

[[Page 53922]]

HUD is proposing a binding mortgage broker contract rather than a

simple disclosure, because a binding contract creates an enforceable

remedy for the borrower and ensures that the terms indicated cannot be

changed or superseded unilaterally by the mortgage broker. The mortgage

broker contract would provide meaningful terms regarding the broker's

functions in the transaction, its duty to the borrower (whether it does

or does not represent the borrower), the potential maximum amount of

compensation to be received in the transaction including the amounts

paid by the borrower and by the lender, and the mortgage broker's State

license number, if applicable.

The contract would clarify for the borrower the differing functions

of mortgage brokers and the role of the mortgage broker in the

particular transaction. The contract would describe two main types of

mortgage brokers, those that represent the borrower (including the two

different variants of mortgage brokers that represent the borrower--

those that do and those that do not receive indirect fees), and those

that do not represent the borrower. Borrowers would be told whether the

mortgage broker represents them and will shop for the most favorable

mortgage loan that meets the borrower's stated objectives from the

lenders the broker does business with, or whether the broker does not

represent the borrower and merely arranges loans. Under the contract,

the broker must disclose how many sources the broker will shop from or

may use for a borrower's loan.

The mortgage broker is to check the appropriate box regarding how

it will function in the particular anticipated transaction. The first

box is for use by a mortgage broker that represents the borrower and

does not receive a fee from the source of mortgage funds. The second

box is for use by a mortgage broker that represents the borrower but

may receive a fee from the lender. Both the first and second box are

for the type of mortgage broker that, by operation of State law, is a

borrower's agent, or that represents itself as a borrower's agent in

arranging a mortgage loan in the transaction. Mortgage brokers that are

agents of the borrower would be allowed to represent themselves to the

consumer as an entity that is required to obtain the most favorable

mortgage loan for the borrower from the sources with which they do

business. The disclosure of the mortgage broker's function and whether

the mortgage broker is receiving fees from the lender will assist the

borrower in assessing whether the mortgage broker works only for the

borrower, has competing interests, or may be receiving indirect fees.

The third box is for use by a mortgage broker that does not

represent the borrower and does not represent itself as a borrower's

agent in arranging a mortgage loan in the transaction. This type of

mortgage broker may deal with one or more than one source of funds and

may receive a fee from the source of funds. This type of mortgage

broker would be required under the contract clearly to inform the

borrower that it is not the borrower's agent and that it arranges loans

from lender(s), and to state the number of lenders with which it

brokers loans. Borrowers would not be lulled into paying more than

necessary to obtain the loan they want on the assumption that this type

of mortgage broker is shopping for the borrower to obtain the best

price available. Thus, mortgage brokers that are not the borrowers'

agents would not be able to take advantage of borrower confusion over

the role of the mortgage broker to obtain a price that exceeds what

informed borrowers would pay. The rule is designed to help ensure that

``what the market will bear'' is not inflated by the borrower's

misimpression as to the service actually being provided.

The contract then describes how brokers are compensated. It also

indicates to borrowers that if a borrower would rather pay a lower

interest rate, the borrower may pay higher upfront points and/or fees.

The contract specifies the maximum points and other compensation and

the maximum total compensation the broker will earn in the transaction

for a loan up to a particular amount and at the rate offered by the

broker. The contract discloses the source of the compensation--the

amount of fees that are to be paid by the borrower and the fees paid by

the lender.

Because the compensation may differ under various combinations of

rates and points, the contract advises the borrower that the broker has

alternative loan arrangements that the broker will display for the

borrower. (HUD plans to develop or to facilitate the development of

software for use by brokers for this purpose that will be distributed

in conjunction with the final rule.)

The contract cautions that the broker's commitment to the amounts

disclosed applies only if the borrower qualifies for the loan.

The back of the contract form would include a useful, preprinted

summary for the borrower of his or her rights in shopping for a

mortgage loan, including rights under RESPA and the mortgage broker

contract.

Those mortgage brokers seeking to qualify for the safe harbor in

Sec. 3500.14(g)(2) would, at the time a consumer expresses serious

interest in obtaining a loan from the broker and prior to application

or before receipt of any payment (whichever is earlier), determine

which of the categories fits its functions respecting the consumer in

the particular transaction. The mortgage broker would, before

application or before receipt of any payment, whichever is earlier,

complete and execute the mortgage broker contract in Appendix F,

deliver a copy to the prospective borrower(s), obtain the borrower's or

borrowers' signature(s), and retain a copy of the contract. Of course,

a mortgage broker could check one box on the form for one transaction

and a different box in a different transaction, depending upon the

mortgage broker's function in the transaction. However, a mortgage

broker would only check one box and complete and execute one form per

transaction. For all transactions in which the mortgage broker wishes

to qualify for the safe harbor, the mortgage broker would be required

to use the form provided and comply with the terms applicable to the

box checked. This will ensure consistency in the mortgage broker

contracts provided to consumers. If an applicant wants the mortgage

broker to shop for more than one type of loan with different rates and

fees, then a separate contract would be executed for each possible

loan.

Mortgage brokers not wishing to qualify for the safe harbor would

not be required to use the form.

2. Performance and Representations Consistent With Contract

During the course of dealings with the prospective borrower(s), the

mortgage broker would have to perform in accordance with the terms of

the mortgage broker contract and not make representations inconsistent

with such contract. The terms of the mortgage broker contract could

only be changed through mutual written agreement between the mortgage

broker and the borrower. A mortgage broker who indicates on the

mortgage broker contract that ``I am your agent and I will get you the

most favorable mortgage loan that meets your stated objectives,'' is

required to get the borrower the most favorable mortgage loan that

meets the borrower's stated objectives from among the sources of funds

with which the mortgage broker discloses it will shop.

3. Disclosure of Fees

In addition to the disclosures of fees in the contract, the

mortgage broker

[[Page 53923]]

would have to disclose fees on the GFE and the HUD-1 or HUD-1A in a

manner consistent with Secs. 3500.7 and 3500.8 of the regulations, as

do all mortgage brokers whether qualifying for the safe harbor or not.

4. Mortgage Broker Licenses

If the State in which the property for which the mortgage loan is

sought has licensing or registration requirements, the mortgage broker

must have a valid license or registration and identify the license or

registration number on the mortgage broker contract. A large proportion

of States require, or are in the process of requiring, that mortgage

brokers be licensed by a State regulatory body. This provision would

make the borrower aware of State regulations and might assist an

aggrieved borrower in pursuing an action under State law against a

mortgage broker. All of the members of the Advisory Committee supported

including this information on the contract.

C. Effect on State Law

Section 18 of RESPA (12 U.S.C. 2616) preempts State law that is

inconsistent with its provisions, unless such law provides greater

protection to the consumer. However, the RESPA regulations in

Sec. 3500.13 provide, in part, that RESPA and the RESPA regulations do

not annul, alter, affect, or exempt any person subject to their

provisions from complying with the laws of any State with respect to

settlement practices, except to the extent of the inconsistency.

Therefore, in accordance with Sec. 3500.13, mortgage brokers must

comply with relevant State laws regarding disclosure of mortgage broker

fees and related issues, except when inconsistent with RESPA or the

implementing regulations. HUD, to the extent feasible, will work with

interested State regulatory bodies to determine if applicable

disclosure terms or requirements may be combined in a single form.

D. Definition of Mortgage Broker

HUD's current definition of ``mortgage broker'' specifically

excludes an ``exclusive agent of a lender'' from the definition of

``mortgage broker.'' This rule proposes to revise the definition to

include an ``exclusive agent of a lender'' and thereby enable such an

entity to qualify for the safe harbor. A mortgage broker that deals

with only one lender may still perform the functions of a mortgage

broker, regardless of whether he or she is the lender's exclusive

agent. Such a mortgage broker could take advantage of the safe harbor

if all applicable criteria are met. This rule proposes a similar

conforming amendment to Sec. 3500.17(b).

E. Questions for Commenters

HUD invites comment on all aspects of today's proposal. In

particular, HUD is interested in the public's view regarding the

following questions:

1. As proposed, the new safe harbor may be rebutted if the total

compensation does not pass a test to be established by HUD. HUD is

specifically requesting comments on an appropriate test or tests to

determine with certainty what, if any, portion of compensation to a

mortgage broker should be impermissible under RESPA. There are numerous

possibilities for such a test that could result from this rulemaking.

Any test established for the final rule must allow brokers, lenders,

and borrowers alike to determine with certainty whether the total

compensation to a broker is or is not legal. Accordingly, commenters

are requested to suggest a quantifiable or otherwise objective test or

tests for examining a broker's total compensation. Suggestions may

include, without limitation, defining the outer boundaries of

permissible or legal total payments in terms of ranges or amounts such

as a specified dollar amount that could vary based on the size of the

loan or as a fixed percentage of the loan amount; if compensation

exceeds a specified range or amount, the excess could rebut the

presumption of legality under section 8. A test also could be based on

comparing the total compensation for a broker's loan to the total

compensation for similar loans by mortgage brokers and lenders to

borrowers of similar credit quality in the broker's area. This could be

accomplished by establishing a baseline of the average market

compensation for comparable loans for an immediately preceding time

period. Any compensation for a loan that exceeds the baseline average

by more than a specific amount could be used to rebut the presumption

of legality.

Additionally, a test could establish the parameters of permissible

compensation through plain and straightforward criteria. This could be

accomplished, for example, by providing that a yield spread premium is

impermissible unless it is considered owned by, under the control of,

and for the benefit of the borrower, or such a premium is impermissible

based upon other fixed criteria. Compensation that does not meet the

established criteria would rebut the presumption of legality. In this

proposed rule, if the mortgage broker does not enter into the specified

contract, any mortgage broker compensation is presumed to violate

section 8(a) or 8(b) of RESPA. This presumption can be overcome if the

total compensation is reasonably related to the value of the goods or

services provided. Commenters are urged to provide any other

formulations that also would provide a clear line between compensation

presumed legal and compensation that would not enjoy such presumption.

HUD requests commenters to provide rule language to accompany any

suggested test(s).

2. As proposed, the rule offers a qualified safe harbor under which

there is a presumption of legality regarding fees to ``mortgage

brokers'' that use the prescribed contract. Is the definition of

``mortgage broker'' under this proposal adequate to avoid the

possibility that settlement service providers or others that do not

provide any real services could take advantage of the exemption to

charge fees? Specifically, should this definition be changed, or should

the final rule also require that a mortgage broker perform certain core

services to qualify for the exemption? In a letter dated February 14,

1995 from Assistant Secretary Retsinas to the Independent Bankers

Association, HUD described certain core services in connection with

mortgage lending. To what, if any, extent should the substance of that

letter be included in this rule? Those favoring additional requirements

should provide their views on what these requirements should be.

3. As proposed, mortgage brokers wishing to qualify for the safe

harbor would check a box on a form, depending upon which of the

alternatives fits the mortgage broker's function in the particular

transaction. HUD seeks comments on alternative approaches or

alternative language for the form explaining the broker's function.

Does the language proposed adequately distinguish the various

categories of mortgage brokers? Would the language proposed unduly

influence the consumer to prefer one type of mortgage broker over

another? What revisions, if any, should be made to the form?

4. As proposed, mortgage brokers wishing to qualify for the safe

harbor must complete and execute the mortgage broker contract ``before

application or before receipt of any payment.'' HUD seeks comments on

whether the final rule should maintain this general requirement

respecting the timing of the disclosure, or whether the rule should

specify a more precise time or occasion when the form should be

provided. HUD also seeks comments on what, if any, requirements should

be included in the rule to address a

[[Page 53924]]

situation in which a broker takes an application over the telephone or

by other electronic means, including through the Internet. HUD believes

the contract should be provided to the borrower as early in the process

as possible, but recognizes that information that is provided too early

can be so imprecise that it is not useful to the consumer.

5. As proposed, the safe harbor would only appear useful to

mortgage brokers that are using table funding or that are acting as

intermediaries; those brokers that lend their own funds or use a

warehouse line of credit would still qualify for the secondary market

exemption. HUD invites comments on whether it should require mortgage

brokers that lend their own funds or use a warehouse line of credit to

disclose their relationship with the borrower. If so, what would be the

basis to impose such a requirement? Should HUD structure a safe harbor

that would encourage mortgage brokers in these other circumstances and

other loan providers to enter into mortgage broker contracts with

borrowers? If so, how would it be structured and what would be its

legal basis?

6. As proposed, mortgage brokers that make available the loan

products of only one source of funds must disclose on the mortgage

broker contract the name of the one lender with which it does business.

Is this a fair burden to impose on such mortgage brokers as a part of

qualifying for the safe harbor? Does it put such mortgage brokers at a

competitive disadvantage?

7. HUD's intent is that the mortgage broker contract would be

binding. HUD seeks views concerning the adequacy of consideration of

each party under the contract.

8. As proposed, if the amounts of the compensation change, it is

anticipated that the broker and the borrower will execute a new

contract or amend the contract. HUD seeks public comments concerning

the most practical methods to be incorporated into the final rule for

affecting changes to the contract. HUD also seeks comments concerning

what, if any, restrictions there should be on changes under the

contract.

9. As proposed, the contract form provides that total compensation

can be disclosed as a dollar amount or as a percentage of the loan.

Would it be preferable to require for purposes of comparison that all

compensation be disclosed in dollar amounts only? What if any problems

would be presented by such a requirement?

10. Should either the contract or regulations address situations in

which the borrower chooses not to ``lock in'' the interest rate and

chooses instead to allow the rate to ``float'' until the borrower locks

in? Should the contract provide that unless the particular loan is

applied for by the borrower by a specified date that the broker's

commitment to the fees set forth in the contract will expire? Those

favoring such provisions should explain what rules, if any, should be

added to address these situations. What, if any, rules would be needed

to protect borrowers? For example, should the broker be required to

provide a new contract detailing the terms of the loan at the lock-in

rate? If the contract were to include an expiration date for the fees

disclosed, can the borrower be protected from entering into an

arrangement too hastily?

11. As proposed, the rule would allow mortgage brokers that

represent the borrower and qualify for the safe harbor to collect fees

from lenders if such compensation is disclosed and meets the other

elements of the safe harbor. Should borrower's-representative mortgage

brokers be permitted to receive such compensation, or should such

compensation be prohibited? If such compensation were forbidden, how

could such mortgage brokers offer ``no fee, no point'' loans? Does the

benefit of allowing the flexibility to fund broker fees from interest

rate offsets outweigh the disadvantage of creating a possible conflict

of interest to the mortgage broker's fiduciary duty to the borrower?

12. As proposed, the rule obligates the mortgage broker--in those

instances in which the broker checks the form to indicate that it

represents the borrower--to obtain ``the most favorable mortgage loan

that meets [the borrower's] stated objectives.'' The form also provides

that the broker will identify how many lenders from which it will shop.

Are these statements of the borrower's-representative duty to the

borrower appropriate? Should the term ``most favorable'' include

factors other than price, including, for example, quality or processing

time of the lender, and should the rule so provide? Should the rule and

the form simply obligate the borrower to obtain the lowest priced loan

for the borrower from among the sources it uses?

13. While the market for purchase money loans and most first

mortgage refinances is well advertised and highly competitive, this is

not necessarily the case for reverse mortgages, as well as home equity,

home improvement, high LTV, Alt A, and other less common types of

loans. What are the arguments for or against limiting the safe harbor

to purchase money and first lien refinancing loans? Should there be any

different requirements for so-called B, C, and D credit?

Findings and Certifications

Paperwork Reduction Act

The proposed information collection requirements contained at

Sec. 3500.14 and Appendix F of this proposed rule have been submitted

to the Office of Management and Budget (OMB) for review, under section

3507(d) of the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35).

An agency may not conduct or sponsor, and a person is not required to

respond to, a collection of information unless the collection displays

a valid control number.

The public reporting burden for each of these collections of

information is estimated to include the time for reviewing and

instructions, searching existing data sources, gathering and

maintaining the data needed, and completing and reviewing the

collection of information. Information on the estimated public

reporting burden is provided in the following table.

Mortgage Broker Contract

--------------------------------------------------------------------------------------------------------------------------------------------------------

Responses

Information collection Number of per Total annual responses Hours per Total hours Regulatory

respondents respondent response reference

--------------------------------------------------------------------------------------------------------------------------------------------------------

Disclosure to the borrower.................... 10,000 400 4mil.............................. .033 132,000 3500.14

--------------------------------------------------------------------------------------------------------------------------------------------------------

(b) In accordance with 5 CFR 1320.8(d)(1), HUD is soliciting

comments from members of the public and affected agencies concerning

the proposed collection of information to:

(1) Evaluate whether the proposed collection of information is

necessary for the proper performance of the

[[Page 53925]]

functions of the agency, including whether the information will have

practical utility;

(2) Evaluate the accuracy of the agency's estimate of the burden of

the proposed collection of information;

(3) Enhance the quality, utility, and clarity of the information to

be collected; and

(4) Minimize the burden of the collection of information on those

who are to respond; including through the use of appropriate automated

collection techniques or other forms of information technology, e.g.,

permitting electronic submission of responses.

Interested persons are invited to submit comments regarding the

information collection requirements in this proposal. Comments must be

received within sixty (60) days from the date of this proposal.

Comments must refer to the proposal by name and docket number (FR-3780)

and must be sent to the Office of Information and Regulatory Affairs of

the Office of Management and Budget (OMB), at the address provided in

the ADDRESSES section of this preamble.

Environmental Impact

In accordance with 24 CFR 50.19(c)(1) of HUD's regulations, this

proposed rule does not direct, provide for assistance or loan and

mortgage insurance for, or otherwise govern or regulate property

acquisition, disposition, lease, rehabilitation, alteration,

demolition, or new construction, or set out or provide for standards

for construction or construction materials, manufactured housing, or

occupancy. Therefore, this proposed rule is categorically excluded from

the requirements of the National Environmental Policy Act (42 U.S.C.

4321).

Executive Order 12866

The Office of Management and Budget (OMB) reviewed this proposed

rule under Executive Order 12866, Regulatory Planning and Review. OMB

determined that this proposed rule is a ``significant regulatory

action,'' as defined in section 3(f) of the Order. Any changes made to

this proposed rule as a result of that review are clearly identified in

the docket file. The docket file and the Economic Analysis prepared for

this proposed rule are available for public inspection between 7:30

a.m. and 5:30 p.m. in the Office of the Rules Docket Clerk, Department

of Housing and Urban Development, Room 10276, 451 Seventh Street, S.W.,

Washington, DC 20410.

Congressional Review of Major Rules

This proposed rule is a ``major rule'' as defined by 5 U.S.C.

804(2) of the Administrative Procedure Act, and will be reviewed by the

Congress at the final rule stage.

Regulatory Flexibility Act

The Secretary, in accordance with the Regulatory Flexibility Act (5

U.S.C. 605(b)), has reviewed this proposed rule before publication and

by approving it certifies that this proposed rule would not have a

significant economic impact on a substantial number of small entities.

This proposed rule would provide a ``safe harbor'' from scrutiny under

section 8 of RESPA for certain fees paid to a mortgage broker, so long

as the mortgage broker complies with the requirements of the proposed

rule. HUD strives to provide flexible requirements in order to reduce

any burden on small entities. Small entities are specifically invited,

however, to comment on whether and how this proposed rule will

significantly affect them, and to provide any alternatives for less

burdensome compliance.

Executive Order 12612, Federalism

The General Counsel, as the Designated Official under section 6(a)

of Executive Order 12612, Federalism, has determined that the policies

contained in this proposed rule would not have substantial direct

effects on States or their political subdivisions, or the relationship

between the Federal Government and the States, or on the distribution

of power and responsibilities among the various levels of government.

As a result, the proposed rule is not subject to review under the

Order. The requirements of the proposed rule are directed toward the

disclosure to borrowers of fees paid to mortgage brokers.

Unfunded Mandates Reform Act

Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) (Pub.

L. 104-4; approved March 22, 1995), establishes requirements for

Federal agencies to assess the effects of their regulatory actions on

State, local, and tribal governments, and on the private sector. This

proposed rule would not impose any Federal mandates on any State,

local, or tribal governments, or on the private sector, within the

meaning of the UMRA.

List of Subjects in 24 CFR Part 3500

Consumer protection, Condominiums, Housing, Mortgage servicing,

Mortgages, Reporting and recordkeeping requirements.

Accordingly, for the reasons set out in the preamble, part 3500 of

title 24 of the Code of Federal Regulations is proposed to be amended

as follows:

1. The authority citation shall continue to read as follows:

Authority: 12 U.S.C. 2601 et seq.; 42 U.S.C. 3535(d).

2. In Sec. 3500.2, paragraph (b) is amended by revising the

definition of ``Mortgage broker'' to read as follows:

Sec. 3500.2 Definitions.

* * * * *

(b) * * *

Mortgage broker means a person (not an employee of a lender) who

brings a borrower and lender together to obtain a federally related

mortgage loan, and who renders services as described in paragraphs (1)

or (2) of the definition of ``Settlement service'' in paragraph (b) of

this section. A loan correspondent meeting the requirements of the

Federal Housing Administration under Sec. 202.2(b) or Sec. 202.15(a) of

this title is a mortgage broker for purposes of this part.

* * * * *

Sec. 3500.7 Amended

3. In Sec. 3500.7, the first sentence of paragraph (b) is revised

by removing the phrase ``who is not an exclusive agent of the lender''.

4. In Sec. 3500.14, paragraphs (g)(2) and (g)(3) are redesignated

as paragraphs (g)(3) and (g)(4), respectively; and a new paragraph

(g)(2) is added, to read as follows:

Sec. 3500.14 Prohibition against kickbacks and unearned fees.

* * * * *

(g)(2)(i) A direct payment from a borrower to a mortgage broker or

a payment from a lender to a mortgage broker in a particular mortgage

loan transaction is presumed to be legal, provided that the following

requirements are met:

(A) Prior to the time of mortgage loan application or receipt of

any payment, whichever is first, the mortgage broker and the

prospective borrower(s) complete and execute a mortgage broker

contract, in the form of appendix F to this part, as appropriate for

the particular transaction.

(B) The mortgage broker represents himself or herself to the

prospective borrower(s) and acts with regard to such borrower(s) in a

manner consistent with the applicable terms of the mortgage broker

contract executed by the mortgage broker, and the mortgage broker makes

no representations to the prospective borrower(s) that are inconsistent

with, and does not act in a

[[Page 53926]]

manner that is inconsistent with, the terms of the mortgage broker

contract. A mortgage broker that indicates on the mortgage broker

contract that ``I am your agent and I will get you the most favorable

mortgage loan that meets your stated objectives'' is required to get

the borrower the most favorable mortgage loan that meets the borrower's

stated objectives from among the sources of funds from which the broker

states in the mortgage broker contract that it will shop.

(C) The mortgage broker discloses its maximum total compensation

along with the amounts of fees from the borrower and the lender for the

transaction in accordance with appendix A to this part 3500,

Secs. 3500.7 and 3500.8, and the mortgage broker contract in the form

of appendix F to this part and the instructions thereto.

(D) If the State in which the property (for which the mortgage loan

is to be obtained in the particular transaction) is located licenses or

registers mortgage brokers, the mortgage broker has a valid license or

registration.

(ii) The terms of the mortgage broker contract referred to in

paragraph (g)(2)(i) of this section can only be changed through mutual

agreement between the mortgage broker and the borrower(s) executed in

writing.

(iii) The presumption established under paragraph (g)(2)(i) of this

section may be rebutted if the total compensation does not pass the

following test: [Test will be published with final rule].

(iv) If the requirements in paragraphs (g)(2)(i) and (g)(2)(ii) of

this section are not satisfied, or if the presumption established under

paragraph (g)(2)(i) of this section is rebutted in accordance with

paragraph (g)(2)(iii) of this section, payments to a mortgage broker

from a lender are presumed to violate section 8(a) or 8(b) of RESPA.

This presumption can be overcome if the total compensation is

reasonably related to the value of the goods or services provided.

* * * * *

5. A new Appendix F to part 3500 is added, to read as follows:

Appendix F to Part 3500--Mortgage Broker Contract

BILLING CODE 4210-27-P

[[Page 53927]]

[GRAPHIC] [TIFF OMITTED] TP16OC97.020

[[Page 53928]]

[GRAPHIC] [TIFF OMITTED] TP16OC97.021

Dated: September 17, 1997.

Nicolas P. Retsinas,

Assistant Secretary for Housing-Federal Housing Administrator.

[FR Doc. 97-27343 Filed 10-15-97; 8:45 am]

BILLING CODE 4210-27-C